Managing RRSP/RRIF Withdrawals: Part II

Most financial advice we get is based on the premise that our post-retirement income will be less than pre-retirement income, and many of us do make less in our senior years.

The RRSP is a great savings vehicle that provides financial incentives to contribute. The deductions defer the income tax we must pay to a later date and this suits many people well.

Related: Read part one of managing your RRIF withdrawals

The impact of taxes on retirement income is an important consideration. The conventional wisdom is to wait as long as possible before withdrawing from RRSP/RRIFs to put off paying taxes as long as possible.

However, seniors who defer RRSP/RRIFs withdrawals until after age 71 can be pushed into a higher tax bracket when the mandatory withdrawals are put into play (and increase each year).

Making withdrawals earlier to smooth out income from year to year makes it work more tax efficiently.

The Plan

Taxable income is used to determine the amount of federal and provincial taxes payable. We have a progressive tax system, which means that your tax rate becomes higher as your taxable income increases.

The first three levels of the federal tax rates for 2015 are as follows:

  • $0 – $11,327 = 0%
  • $11,327.01 – 44,701 = 15%
  • $44,701.01 – 89,401 = 22%

Provinces have their own rates and may also have more brackets.

Your marginal tax rate is significant in tax planning because it represents the highest rate of tax you pay on your income at that level.

Net income is important as it used to calculate income-tested benefits such as OAS and non-refundable tax credits such as the Age Credit, as well as provincial health care and drug programs, and social supports.

Related: Create your retirement income plan

The RRSP/RRIF withdrawal strategy here is designed to reduce taxes and clawbacks by moving income out of the higher tax bracket one may find themselves in as a result of mandatory withdrawals after age 71, and equalizing income.

The goal is to strategically melt down existing RRSPs by withdrawing money up to the top of your current federal tax bracket over a period of years to smooth out taxable income from year to year, even if it’s not needed for cash flow.

It’s better to withdraw earlier even if you have to pay tax on the withdrawals. If you don’t need the money, transfer it to a TFSA for further tax-exempt growth.

This strategy is effective for early retirees (before age 65). It might pay off in the long run because it doesn’t erode the Age Credit and OAS benefits.

Lower income seniors

Most low-income adults are eligible for GIS payments, a means tested program. For those who have saved in RRSPs each $1 withdrawn results in a clawback of 50 cents from GIS – equivalent to a 50% marginal tax rate.

Related: Retirement planning for late starters

People with lower incomes should draw down their RRSPs before age 65 so the GIS remains intact or little changed.

Final thoughts

Taxes represent one of the largest personal expenses a retiree may have. I believe that we should use any legitimate strategies available to us to reduce tax payments, especially when it comes to our life savings. Our retirement nest egg can also become the CRA’s nest egg.

The current retirement income system serves the vast majority of Canadians very well. Make an effort to make it tax efficient also by determining the right drawdown strategy for your personal situation.

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  1. Freedom on March 13, 2015 at 7:34 am

    I have a pension plan at work but I still contribute to my RRSP. I plan to retire around 58 and start melting down my RRSP between 58-70, putting away as much as I can into my TFSA during that time for future tax-free growth that won’t impact means-tested programs like OAS.

    • Boomer on March 13, 2015 at 10:08 am

      @Freedom: This is an especially good plan for those, such as yourself, who plan to retire from their jobs before the “normal” retirement age. It can also bridge income needs before OAS and other benefits kick in.

      Thank you for sharing.

  2. Brian James on March 13, 2015 at 9:17 am

    Boy, wish I had known all this years ago! But the average canadian just doesn’t receive the financial education that would help so much in optimizing the retirement experience. Certainly that was the case with me until I was lucky enough to snag you as my advisor.

    Thanks for the excellent heads-up, Marie; better late than never!

    • Boomer on March 13, 2015 at 10:11 am

      Thank you Brian. As a former banker, I’m embarrassed to say I toed the company line by encouraging maximum RRSP contributions regardless of circumstances. “And, if you don’t have the money to save, I can give you a loan to help you out.”

      I could do a post on the myths your banker tells you. Although, to be fair, we didn’t know better at the time.

  3. Tony Dadson on March 13, 2015 at 10:53 am

    Using legitimate strategies to reduce tax payments is one thing.Using them to qualify for GIS and full OAS designed to protect the poor is quite another. It may be legal but it smells bad to me.

    • Boomer on March 13, 2015 at 6:24 pm

      @Tony Dadson: I agree with you for the most part. Changes should be made to social programs to protect them from abuse.

      But, there are many retirees who feel that they are now being penalized for saving all their lives and receiving little benefit.

      • Tony Dadson on March 13, 2015 at 6:36 pm

        I have been tempted to rationalize it that way myself, but at the end of the day it is taking money that wasn’t intended for me. Each to their own.

        • Alan on March 16, 2015 at 9:45 am

          I totally agree. I’ve seen too many cases where people give their money to their kids or hide it in chequing accounts or safety deposit boxes (!) for the sole reason of getting the GIS. Very unsavoury in my opinion.

          • Tony dadson on March 16, 2015 at 1:56 pm

            And so many financial advisors are recommending this kind of financial planning. Kind of disappointing to see.

    • Sab on December 2, 2022 at 9:02 pm

      Is there a known tool for determining when is best to begin an early rrsp melt down?

  4. Bev B on March 13, 2015 at 12:01 pm

    I myself am happy for the advice! I don’t believe any of us would be proud to admit we needed or qualified for the GIS but I for one would rather be better safe than sorry. We all have our own unique situations which is no ones business but our own. Mine for example is that I have a second husband 14 years younger than I & neither of us make big money. Although I was VERY diligent for my 62 years I needed to retire this year from health issues. I would hate to run out of money & leave my husband with nothing for his retirement. We have been married for 17 years & hope to have many more but who knows. At just the time he will be looking to retire or slow down, I would be very disturbed if I had to pay a lot of money in tax. Just like was said earlier, we don’t know these things. Will we have enough money??? We are living on $2,000. a month now, but I didn’t work & save hard all those years to be afraid to even go to McDonalds once a week. I try hard to look after everything even opening our own brokerage account with ETF’s & a combined valued at over $800,000. so please don’t judge. I know plenty of people who have had big incomes & still lived way beyond their means for years & now get GIS. It makes me mad also, but if I’ve done everything right, can save a little tax & need it, then…. that’s what it’s there for. At least I tried not to use the system.

    • Tony Dadson on March 13, 2015 at 2:15 pm

      That is not what its there for

  5. kcowan on March 13, 2015 at 1:13 pm

    During my first 10 years of retirement, I had a couple of years paying zero tax. Those were the years I should have withdrawn from my RRSP. Now I am forced to withdraw every year! At least the rate is based on my younger wife!

    But paying taxes is a privilege (at least that is what my father said)!

    • Bev B on March 13, 2015 at 4:30 pm

      I agree it is a problem lots of people wish they had. I just want to make sure I’m informed as to the best way to do that. I don’t mind paying my fair share, of course, but wish I had a little more knowledge. Reading is endless & sometimes I’m not much further ahead. It can really suck time & make you a little crazy/ obsessed /confused. Does anyone know any books or websites / articles . I think I should at least take out $11,000 a year (for my husband & I) if possible to transfer to TFSA as mentioned. That’s a start. Can I make a withdrawal from a RRIF & an RRSP or just 1 account at a time? I know how to save & be super thrifty…now I need to know how to preserve capital. We have dividend income but I hesitate to start selling stuff before I need to because then the dividend income won’t be there. I transferred some this year to a non registered account – in kind – so I can get the dividend income source…… & yes I still pay taxes on that income on both withdrawal & income from dividends. I assure you, I know I’ll be paying tax forever, just want to enjoy retirement a little along the way. Any help would be appreciated…

  6. David G on March 14, 2015 at 6:01 am

    My understanding is that you convert your RRSP to a RRIF and then start withdrawing from the RRIF, paying tax on the withdrawals.

    • Bev B on March 14, 2015 at 9:46 am

      Thanks David. Yes I had one LIRA that they unlocked & split part into a RRIF & the balance went into my RRSP. Because I’m only allowed (I think) 4% withdrawal my maximum this year was only at little over $5,000. & I had tax withdrawn at the source…. Not much left! I guess next year I’ll have to talk to the bank to see my options…the problem is, most of them are uninformed & you really need to know the answer before you call to know what your entitled to. I think I may apply under different rules. David Aston wrote an article for Moneysense magazine on Oct 27th 2011 which was very informative. I’ll keep checking…thanks

  7. Freddie on November 9, 2015 at 12:15 pm

    Hi, Like the idea of taking RRSP’s out early. Currently I have no income but my spouse makes enough to cover us. I would like to take out some funds from my RRSP, not the spousal one..3 year rule. I live in Ontario and the marginal tax rates are 20.05% up to $40,922 and 24.15% over that and up to the $44,700.

    Should I take RRSP funds out to the $44,700 amount or the $40,922 amount? How do I determine which would be better?


  8. Boomer on November 10, 2015 at 7:04 pm

    @Freddie: I would take out $40,922. You would pay approx. $6,458 tax for a mean rate of 15.78%.

    On $44,701 you would pay about $7,370 in tax (mean rate of 16.49%) which is almost $1,000 more for only less than $4,000 extra withdrawal.

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